The attacks by The Treasury on ‘managed service’ and ‘personal service’ companies will fail, because contractors who use them are just like other owners of small companies.
The Chancellor, in his pre-budget speech devoted considerable time to contractors. As far as HM Treasury is concerned, we are a hot topic, a problem to be solved. We are blamed for “taking unfair advantage of the tax laws,” yet we are never rewarded for providing services that UK industry desperately need.
Ironically, it is the very success of contracting that has brought it into the pre-budgetary limelight. We were 65,000 in 2002, and now we are about 250,000 in the UK. This is not because of the so-called ‘tax advantages’ contractors enjoy: UK industry increasingly needs a flexible workforce, and, according to the Treasury’s statistics, about 10,000 more IT workers and engineers become contractors every quarter.
This means that an ever-larger number of us have the brains and the guts to act as pioneers.
Yet contractors do not get the perquisites and extras that employees routinely receive. We have to arrange our own insurance, calculate our own taxes, pay our own expenses, just like the nice couple who owns the little corner shop. But the couple at the corner shop won’t be targeted by the Revenue for taking part of their income as dividends, or for having someone else help them mind the store.
we are never rewarded for providing services that UK industry desperately need
The Revenue's Stance
Why does the Revenue claim that contractors are different? The case is laid out in a document published in December. It says: “If you provide your services to a client (the end-user) via an intermediary, typically a service company or partnership, then this legislation may apply to engagements with that client. “ What kind of engagements? The Revenue says:
- “you personally perform services for another person (the client);
- the services are provided not directly with the client but under arrangements involving an intermediary; and
- the circumstances are such that, if you had provided the services directly to the client under a contract between you and the client, you would have been regarded for income tax purposes as an employee of the client and/or, for NICs purposes, as employed in employed earner’s employment by the client.”
That’s the Revenue’s take: you’re really working like any other employee, so you have to pay National Insurance and income tax in the same way. There are a few other tests as well, as in deciding whether or not you participate in the management of the limited company.
Are Contractors Really That Different?
But even when we work for a single company through an umbrella company, are we really so different from that nice couple at the corner store? That couple probably uses an accountant to manage their finances and do their taxes. They might even, if they were a bit upscale, work with marketing or management consultant to help them run the company. Or they might take advice from a recruiter about employing people in the store, or from a solicitor to avoid being sued.
So do they “participate in the management of the company” if they take advice and follow it? Do they become employees if they take too much advice?
Okay, the nice couple at the corner store has a slew of clients who pop in for cans of soup and jars of marmite. What is so different about their business model? They sell goods in the same way that a contractor sells his services. If an extremely undernourished family arrived and bought up everything in the shop, would that mean they would be caught within IR35?
It’s fine to make jokes about these issues, but there is really nothing funny about the government’s attacks on contractors. Governments and bureaucracies are not early adopters: that means that they will have to learn to live with a workforce that increasingly does not abide by the old rules.
The challenge is with government to change the laws as the workforce is changing. Penalising the contractor for the government’s failure to do so simply makes no sense and won’t work.
The challenge is with government to change the laws as the workforce is changing
Dave Chaplin is the founder and CEO of www.ContractorCalculator.co.uk, the most popular website for contractors in the UK.